# EBF 401 EBF401 Midterm 1 with Answers

EBF 401 EBF401 Midterm 1 Answers (VERSION 2) (Penn State University)

**Multiple-choice questions (2 points each)**

1. Assets are listed on the balance sheet in order of:

a. Decreasing liquidity;

b. Decreasing size;

c. Increasing size;

d. Relative life;

e. None of these.

2. Total assets are $1,000, fixed assets are $700, long-term debt is $250, and short-term debt is $300. What is the amount of net working capital?

a. $0;

b. $50;

c. $300;

d. $650;

e. $700.

3. Which of the following statements concerning interest rates is correct?

a. The stated rate is the same as the effective annual rate;

b. An effective annual rate is the rate that applies if interest was charged annually;

c. The annual percentage rate increases as the number of compounding periods per year increases;

d. Banks prefer more frequent compounding on their savings accounts;

e. For any positive interest rate, the effective annual rate will always exceed the annual percentage rate.

4. Beatrice invests $1,000 in an account that pays 4% simple interest. How much more could she have earned over a five-year period, if the interest had compounded annually?

a. $15.45;

b. $15.97;

c. $16.65;

d. $17.09;

e. $21.67.

5. Your grandmother invested one lump sum 17 years ago at 4.25% interest. Today, she gave you the proceeds of that investment which totaled $5,539.92. How much did your grandmother originally invest?

a. $2,700.00;

b. $2,730.30;

c. $2,750.00;

d. $2,768.40;

e. $2,774.90.

6. An investment is acceptable if its IRR:

a. Is exactly equal to its NPV;

b. Is exactly equal to zero;

c. Is less than the required return;

d. Exceeds the required return;

e. Is equal to 100%.

7. Analysis using the profitability index:

a. Frequently conflicts with the accept and reject decisions generated by the application of the net present value rule;

b. Is useful as a decision tool when investment funds are limited;

c. Cannot be used to aid capital rationing;

d. Uses the same basic variables as those used in the average accounting return;

e. Produces results which typically are difficult to apply.

8. All else constant, a bond will sell at _____ when the yield to maturity is ____ the coupon rate.

a. A premium; higher than;

b. A premium; equal to;

c. At par; higher than;

d. At par; less than;

e. A discount; higher than.

9. Face value is:

a. Always higher than current price;

b. Always lower than current price;

c. The same as current price;

d. The coupon amount;

e. None of these.

10. The stock valuation model that determines the current stock price by dividing the next annual dividend amount by the excess of the discount rate less the dividend growth rate is called the ____ model:

a. Zero growth;

b. Dividend growth;

c. Capital pricing;

d. Earnings capitalization;

e. Differential growth.

11. Why might one expect managers to act in shareholders’ interests? Give some reasons.

12. Explain why the yield curve usually slopes up.

13. Define the depreciation tax shield and explain why accounting for it is important when calculating free cash flow. Give an example (assuming that capital expenditures and net working capital are equal to zero).

14. Explain why the NPV capital budgeting rule is optimal.

15. What is the present value of a perpetuity paying $8 each month, beginning this month (in 1 second), if the monthly interest rate is a constant 0.5% per month and the cash flows will grow at a rate of 0.8% per month?

16. The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated below. The corporate tax rate is 40%. All net working capital is recovered at the end of the project.

17. Suppose that you purchase a 30-year, zero-coupon bond with a yield to maturity of 5%.

18. Suppose you expect Longs Drug Stores to pay an annual dividend of $0.56 per share in the coming year and to trade for $45.50 per share at the end of the year. If investments with equivalent risk to Longs’ stock have an expected return of 6.80%:

a. What is the most you would pay today for Longs’ stock?

b. What dividend yield and capital gain (in %) would you expect at this price?